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Picturing Retirement Differently


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There’s a familiar pattern for how markets treat tight political events. First, investors ignore them. Then, a few months ahead, some start to hedge against a bad outcome. About two weeks beforehand, panic sets in. Only facts are objective, yet we treat opinions and inferences as facts. The stock market has been a frustrating roller coaster ride to nowhere that last couple of years. If you are in retirement or close to retirement one should carefully consider being in market at all.

It can be a mistake to cite movements in the stock market as evidence for your view of the market strength. This can lead to optimists ignoring inconvenient stock market plunges and pessimists self-servingly dismissing the rallies. The dip-recovery-dip of the last 18 months that the S&P 500 is now almost in the same place as it was at the end of 2014.

When you are picturing retirement, you should consider certain things, what you will spend when you no longer are working, the amount of your pension and Social Security, how much you have in savings, how long you will live, how much of your assets you wish to leave to family, what rates of returns are possible for your portfolio.

A surprising number of us are having nightmares about retirement instead of dreaming about it. They worry about their savings being adequate to support them in retirement, in particular, the fear of running out of money and not having the money to pay for the things they want to dol

There’s no way to know exactly how much money you’ll need in retirement. After all, you don’t know how long you’ll live or what unexpected costs you may face, such as medical or long term care expenses. There’s no magic formula for retirement savings, and life has a way of throwing curveballs — think layoffs and medical emergencies — that will force you to adjust your savings plan.

Planning for retirement is a complicated business. That’s as it should be; this is your nest egg after all. It’s how you’ll pay the bills and enjoy life after leaving work, so it makes perfect sense there’d be more than a few moving pieces. Funding retirement is all about trade-offs. There are many variables and they come with vastly different costs. Retirees or near Retirees have been programmed to save-save-save throughout the years, and now find it difficult to turn those savings into an income stream.

Money is an intimidating topic for many people, and there are different priorities for different stages in life. There are the famous five stages of grief that people go through after the loss of a loved one. Denial. Anger. Bargaining. Depression. Acceptance. They also reflect how we cope with bad news, whether it’s the defeat of a candidate we support or, for investors, the end of a bull market. Any plan requires careful thought.

Most retirees and near retirees are unwilling to expose their savings further to traditional stock and bond market investment. That is when Fixed Indexed Annuity (FIA) came to prominence as a safer alternative to traditional financial investment. FIAs offer very unique features to you, like:

  • A locked-in interest: An FIA’s indexed interest is locked in each and every year by a feature called annual reset and can never be lost due to a market downturn, on the contrary to your other investments. That means, any interest you earn is protected and therefore your principal too.
  • Timing: Whether or not you know exactly when you will retire, you cannot predict how the markets will be performing at that time. For example, many investments had a negative return multiple times over the last ten years. What if your wish to retire was at the end of those negative years? With an FIA, the accumulation value will never be lost due to market ups and downs. So when you choose to start taking income from the contract, it is impossible due to the locked-in-interest that you will have lost any earned interest.
  • Lifetime income: One of the most important features of an annuity that no other retirement planning vehicle can do is to provide a guaranteed lifetime income. An annuity is the only retirement vehicle that will guarantee that you will never be able to outlive your retirement savings.

Fixed Indexed Annuities have emerged as the most popular financial instrument for investors who are risk averse and want a guaranteed return on their investment. The increasing demand for low risk investment instruments has fueled popularity of these FIAs. They are ideal for investors to secure their retirement savings and provide a guaranteed lifetime income that prove invaluable during their retirement phase.

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Sunday, July 10th, 2016 Wealth Management Comments Off on Picturing Retirement Differently

Potential Safety in Retirement

Retirement plans often involve traveling, socializing and feeling financially secure. Most financial planners recommend that workers have enough cash saved to replace 70 percent to 80 percent of their income in retirement. After all, you don’t just want to retire — you’d like to retire well.

Interest in stocks remains low. Individuals have been staying the course, for the most part. But their course is to keep as far away from the stock market as possible. A year after the market reached record highs and it looked like there was nothing that could stop what has become the second-longest bull market in history, market participants are pulling money off the table and heading for cover. This retreat from equities actually has been going on for eight years.

The financial crisis and global meltdown that followed scared the pants off many investors. Middle-class Americans have been the most likely to flee the market. Often what upends the stock market is when potential bad stuff that investors know about — but underestimate and don’t sufficiently guard against — happens. The fear out there is that there is another shoe to drop somewhere down the road.

Many investment advisors right now are now offering advice without telling their customers that they are being paid by investment companies to sell particular expensive and highly profitable investment products, to the exclusion of other products, no matter the best interest of their clients.

The history is that the executives at some of the worst investment companies were not punished for what they do. But this is the nature of these things. The ones running the machine did not get punished after the dot-com bubble either. The little guy will pay for it — the small investor.

Everyday on the Internet you can read articles telling that fixed index annuities (FIAs) are not right for you, and that you rather should look at purchasing stocks, bonds, or mutual funds instead because of their potential returns. An FIA is not an investment like stocks, bonds, and mutual funds. It is a contract between you and an insurer. Annuities should be considered as long term vehicles that offer tax deferral, a variety of income options, and a death benefit. FIAs offer very unique features to you, like:

  • A locked-in interest: An FIA’s indexed interest is locked in each and every year by a feature called annual reset and can never be lost due to a market downturn, on the contrary to your other investments. That means, any interest you earn is protected and therefore your principal too.
  • Timing: Whether or not you know exactly when you will retire, you cannot predict how the markets will be performing at that time. For example, many investments had a negative return multiple times over the last ten years. What if your wish to retire was at the end of those negative years? With an FIA, the accumulation value will never be lost due to market ups and downs. So when you choose to start taking income from the contract, it is impossible due to the locked-in-interest that you will have lost any earned interest.
  • Lifetime income: One of the most important features of an annuity that no other retirement planning vehicle can do is to provide a guaranteed lifetime income. An annuity is the only retirement vehicle that will guarantee that you will never be able to outlive your retirement savings. .

When you are told to look at one aspect of retirement vehicles, you can easily be swayed to look at alternatives other than annuities. The package of benefits and guarantees offered by fixed index annuities is hard to beat and should be a part of every solid and reliable retirement plan. A retirement portfolio shouldn’t be a set of stocks that you simply sit on while you hope they merely track the market or don’t lose you a ton of money. It doesn’t have to be a slow crawl of income and no growth.

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Saturday, May 21st, 2016 Wealth Management Comments Off on Potential Safety in Retirement

Cornerstone of Retirement

Social Security may be the cornerstone of income for retirees, but an annuity may be the next best thing.  Retiree satisfaction levels are eroding as many were forced to sell assets while prices were depressed during the recent financial crisis and they have been standing on the sidelines for much of the recovery. Investors are pulling money from equities at an unprecedented rate in addition, Interest rates have little room to drop further as they are less than 1%.

The S&P 500 briefly fell into negative territory for the year so far. Dodging and weaving through three 10 percent drops in the last 19 months the market is really showing signs of fatigue: for the first time its rolling 12-month return is negative, and companies in the Standard & Poor’s 500 Index are reporting their worst profits in six years.

Because it’s a mistrusted bull market no one wants to be the last person who puts their money in. Certainly we’re closer to the end than the beginning.  That means investors will have to save more, retire later or live less comfortably during retirement, which could further drag down economic growth.

The not-so-good first-quarter news is that while the S&P 500 index was close to flat, year over year, the average 401(k) account balance fell an average 5 percent. As an example, account balances suffered in the Great Recession because the stock market crashed and many people who lost jobs raided their 401(k) to pay the rent and buy the groceries.

For many working Americans, the tax break for saving for retirement just doesn’t add up to enough money to get them to forgo their current consumption. If you’re in the 10% or 15% tax bracket like most middle-class Americans, you won’t save much on your taxes by putting money in a 401(k) or IRA.

The introduction of 401(k) plans, IRAs and similar tax-sheltering savings plans was supposed to ensure that everyone would have adequate retirement resources. When American companies began switching from traditional pensions to self-directed 401(k)-like plans in the 1980s and 1990s, it was supposed to lead to a golden age of retirement security.

No longer would workers be at the mercy of the company’s generosity or of Social Security’s solvency; workers themselves would be responsible for saving enough for a comfortable retirement. The result is the do-it-yourself pension system is a disaster. The sad fact is that most Americans are less prepared for retirement than Americans were 30 years ago.

Most investors are better off sticking their money in a Fixed Indexed Annuity instead of trying to beat the market by employing professional stock-pickers who charge high fees and eat up capital like crazy. There have been a few of these managers who have actually succeeded but it’s a tiny group of people. It’s like looking for a needle in a haystack.

Many people live with historically low interest rates to get FDIC protection for their certificates of deposit. When you learn more about the guarantees an annuity can give you, with much higher interest, you may well be more comfortable. See, the issuing company (an insurance company or an annuity company) guarantees your principal. In a deferred fixed index annuity, the company also guarantees the interest you earn.

Is this guarantee worthwhile? There are at least a couple of reasons you can rely on the guarantee of a company that issues an annuity.

First, your State’s Insurance Commissioner regulates the companies that offer annuities. This includes audits and other oversight. They also regulate how annuities are sold to you. The Insurance Commissioners do not want long-term annuities sold to people for whom they are not suitable.

Second, Insurance Commissioners demand that an issuing company has enough reserves set aside to pay its obligations to you and other annuity and life insurance contract owners. That means if the company goes under in its general finances, your money is set aside and safe.

Third, if a company does go under, the tradition is that other companies come in and buy up the contracts that are still outstanding to contract owners. The benefits get paid one way or the other.

So, with all these protections, the contractual guarantee of a life insurance or annuity company is very strong. There are few instances of anyone losing their money in a fixed interest annuity.

In many states annuities that you own individually are protected from your creditors. The sheriff cannot “levy” on annuities when a judgment against you is collected. If the annuities are in an IRA or qualified plan, Federal rules give even extra protection.

This is important for several reasons. First, even though Certificates of Deposit have guarantees from loss by the FDIC if your bank goes bust, they are not protected from your creditors. You might set them up in “tenancies by the entirety” with your spouse. That works. But if your spouse dies before you; the protection goes away. Stock brokerage accounts are protected to a degree by SIPC. However, they are also subject to the claims of your creditors.

So, with all these protections, the contractual guarantee of a life insurance or annuity company is very strong. There are few instances of anyone losing their money in a fixed interest annuity.

This kind of contract is for the person with safety is chief on their mind. So, the guarantees of regulated companies provide comfort. Index interest can provide more than other interest bearing investments; a lot more than Certificates of Deposit under current rates.

They enjoy the protection from creditors. Most important, the deferred fixed index annuity offers growth without market risk, and lifelong income after the payment stream starts.  The deferred fixed index annuity is an important tool to guarantee we have a comfortable retirement; especially if we are fortunate to live a long time.

 

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Friday, May 6th, 2016 Wealth Management Comments Off on Cornerstone of Retirement

Annuities Provide Income Certainty

Retirement planning has changed a lot over the last few decades.  Pension plans became very costly for businesses. So, the private sector has largely transitioned to 401(k) plans for its workers instead — which has resulted in plenty of new challenges, including the need for Americans to take charge of their investments as well as the rate of their retirement savings.

The power of compound returns is a basic tenet of investing, but it’s still shocking to see how it works especially with the extremely low interest rates offered at this time. The problem with the current interest rates is that it’s unfair that people who’ve saved every penny, paid off mortgages, and everything they were supposed to do and they were going to retire with their beautiful nest egg and now they’re getting one-eighth of 1%.

What makes resistance to the stock market is that seniors who bought at a certain level – only to see the market fall from there.  Investors need to consider the sequence of returns in retirement, because if their portfolio is all invested in equities and they take money out of their portfolio while the market is down that can rapidly accelerate the depletion of their assets.

Standard retirement investing advice has you invest heavily in stocks early in your career and then slowly adopt a more conservative strategy going forward. One simple rule involves taking your age and subtracting it from 100, and that gives you the percentage of your portfolio you should invest in stocks.

Longevity risk is a growing concern for today’s workers and retirees…many Americans are facing the likelihood of outliving their resources. Increased longevity has had a profound impact on how one must plan for retirement.  Nevertheless, many are not financially prepared for these extra years of life.

One of the big reasons retirees may end up spending more than they thought they would is because of how much they unexpectedly have to spend on health care — that’s up nearly 30% over the past decade — on health care throughout retirement, even though they have Medicare health coverage.

For those who don’t have the backstop of a traditional defined-benefit pension plan, however, annuities could be an attractive way to re-create the kind of guaranteed retirement income most Americans enjoyed in decades past.  Annuities make it so you can still have a pension.  The basic feature of an annuity that makes it attractive to savers is the promise of a guaranteed income stream for the rest of their lives.

That kind of certainty is hard to replicate with other investments, which can fluctuate in value or income potential over time.  In its purest form, an annuity is taking a portion of my assets and turning it into a lifetime income stream   That’s an incredibly appealing idea to people who don’t have the guarantee of a pension plan.

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Thursday, April 21st, 2016 Wealth Management Comments Off on Annuities Provide Income Certainty

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